Effect of Environmental Penalties on the Cost of Equity – The Role of Corporate Environmental Disclosures

Abstract

Environmental administrative penalty is a powerful way for the government to realize environmental pollution control. When a firm is subjected to an environmental administrative penalty, how the penalty affects its equity cost is a hot issue in academia and industry. Using the ordinary least square method and the Bootstrap method, it is found that environmental penalties significantly increase corporate equity costs in the following year through their disclosure increments; the disclosure increment plays a mediating role in the positive effect. It is also found that the reduced negative information disclosures can increase the effect, while the increased positive information can reduce the effect. These findings help us understand environmental management's significance to a firm's financing sustainability and have practical enlightenment on environmental management and environmental pollution control.